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Market Update: Oil & Gas - November 2016

Market Update: Oil & Gas - November 2016

November has proven to be an action filled month for Planet Earth. Donald Trump’s election as the next President of the United States on November 8 stunned the world’s global energy markets and media. Crude oil prices plunged as much as 4 percent on the day of the surprise victory, with NYMEX WTI contract hitting a 2-month low of US$43/bbl. Analysts cited economic uncertainty and the President-elect’s plans to cut the ‘red-tape’ of the upstream US oil and gas sector. Nonetheless, the eyes of the energy theatre have now firmly turned to Vienna. On November 30 members of OPEC will meet to potentially finalize an agreement to cut crude output. As it stands, OPEC have ‘talked the talk’. Whether they will ‘walk the walk’ and ratify the proposed production cutback remains a multi-billion dollar question.

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US climate and energy agenda upended by Trump victory

The election of Donald Trump as the US President on November 8 will undoubtedly reverberate through the global energy landscape.

While domestic fiscal, monetary, and trade policy will have important implications for oil demand, the most notable directional shift on energy will be on climate change policy. The momentum on climate change policy witnessed over the past few years, especially leading up to the signing and ratification of the Paris Agreement, were in no small part due to President Obama’s leadership. Trump may now seek to withdraw the US from the Paris Agreement, in the meanwhile ignoring US domestic targets embodied within it and dismantling US regulations designed to meet its targets. Not only would US withdrawal represent a material blow to the ability of the international community to meet the Paris goal to contain global temperature increases to well below 2 degrees Celsius, it would also be a symbolic setback to the positive momentum on global climate change policy seen in recent years. Moreover, though Europe’s commitment to climate change is mostly independent of US action, the US reneging on its Paris commitments ofers leeway to other countries to backslide on their targets.

Domestically, the US oil and gas industry will find a friendlier administration, including one that loosens upstream regulations and facilitates pipeline approvals. The election is not a game-changer for boosting US shale production however, as the price environment will be the key driver for rig activity. Nonetheless, improved regulatory environment (including access to additional acreage) would likely boost US competitiveness and favor the US industry for investment flows.

The centerpiece of Obama’s climate change agenda was the Clean Power Plan. It could therefore be the focus of the Trump administration’s effort to dismantle the Obama climate legacy. Though the plan is not yet operational, when it was supposed to take effect in 2022, it would have driven more coal out of the generation mix in favor of gas and renewables. Nonetheless, natural gas demand will still benefit from low prices while renewables will likely benefit from tax credits and state policies.

"Though Trump has taken an anti-trade stance during his campaign, it is unlikely that this position would extend to curtailing US oil or LNG exports, especially given his support of the domestic oil and gas sector. As such, US crude and LNG exports will likely continue their growth over the coming four years. Pipeline gas exports to Mexico could become entangled in NAFTA renegotiations, but would likely continue in light of the major boon they will provide for US exporters."

Implications of Trump on the Trans-Pacific Partnership (TPP)

Since the beginning of his presidential campaign, Donald Trump’s stance on trade-related matters has been clear, "To negotiate fair trade deals that create American jobs, increase American wages and reduce America’s trade deficit."

With much of his campaign striking protectionist chords for working-class Americans, a core priority agenda for Trump’s presidency is to initiate a wave of trade reforms. With the renegotiation of the NAFTA terms on the table, Trump has claimed that on his first day he will cut the US’ involvement in the TPP – a trade agreement between twelve Pacific Rim countries and has instructed the Treasury Secretary to label China as a currency manipulator.

"A potential US withdrawal from the TPP may not have the impact that perhaps Trump intends, as the TPP deal acted as a counterweight to China’s ambitions to expand its influence within the Asian region. The Chinese influence extends beyond purely the economic and trade-related, and also touches on elements such as geopolitics and territorial disputes (e.g. China’s island building in an area through which one-third of the world’s trade flows through). Any economic gains by the US from Trump’s trade reform might be offset by the Pacific Rim countries having few alternatives but to provide further leverage to China. With Trump’s inauguration scheduled for the 20 January 2017, Asian markets have time to process (and price in) the potential impact of his presidency."

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